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calenderMar 14, 2024

What is Car Loan and how does it work?

Are you looking to purchase a car but lack the necessary funds to make a purchase? A clear understanding of Auto Loan meaning and how it works can help you with a hassle-free Car Loan journey with your lender.

But what is an Auto Loan? And how does it work? Having a good understanding and clarity about how Car Loans work can make your loan application process easy and seamless.

What is a Car Loan?


A Car Loan or Auto Loan is a credit taken from a bank or financial institution, specifically to buy a car. In this scenario, the dealer of the car is paid upfront by the lender, and the borrower is expected to pay the lender the full loan amount along with the applicable interest and fees.

Once the entire amount is paid, the lender will register the car under your name. In case you default on the loan, your car will be used as collateral.

Now, you might be wondering what a Vehicle Loan is and whether it differs from a Car Loan.

A Vehicle Loan is similar to an Auto Loan, the only difference is that the Vehicle Loan include all kinds of two-wheeler and four-wheeler vehicle purchases. It includes trucks, buses, scooters, etc. The exact specifics of the loan vary depending on your lender, credit score, and desired car.

The Axis Bank offers a New Car Loan with attractive interest rates and comfortable tenure, which extends up to 7 years and ranges from ₹1 lakh to 100% on-road financing for your vehicle. You can use a Car Loan EMI calculator to work out the different options for loan amounts and tenure to get the best EMI option.

How do Auto Loans work?


Learning about the workings of these loans is important to understand them better.

Generally, Auto Loans involve three parties: the car seller, the lender, and the borrower.

There are three financing options to choose a lender for your Car Loan.

1. Dealer financing

This is often the most convenient way to finance your car purchase. In dealer financing, your seller agrees to become the lender or ties up with other

lenders to make the loan process easier. This way, you can buy and lend from the same place without getting into the hassle of applying for a loan elsewhere.

2. Banks and NBFCs

Banks and non-banking financial companies (NBFCs) provide Car Loans at lower interest rates. These lending institutions generally check your credit scores. A higher credit score increases your loan approval chances at lower interest rates. Applying for Car Loans in advance with the bank is advised to avoid last-minute hassles.

3. Online Auto Loans

Applying for loans online can be an efficient way to process your Car Loan. The online application process is similar to bank loan applications, except these loans are processed remotely. In many cases, online lenders might be more willing to lend to individuals with an average or below-average credit score.

What are the features of an auto Loan?


Auto Loans differ from other types of loans due to many favourable features, such as:

1) High-value financing

A lowered down payment is the greatest benefit of purchasing a car through an Auto Loan. As the loan covers a large amount of the car’s cost, you do not need to pay much cash upfront.

2) Secured loans

Auto Loans are often considered more secure than other kinds of loans. This is because the purchased vehicle acts as collateral in case of a default. Hence, it is easier to get lower interest rates for these loans.

3) Flexible repayment terms

The repayment options for Auto Loans are generally very flexible, ranging from a few months to seven years, depending on the type of vehicle and the monthly EMIs payable.

4) Easier eligibility criteria

The eligibility criteria for an Auto Loan generally include a minimum salary requirement along with an average credit score. These criteria vary depending on the type of vehicle being purchased.

5) Convenient processing and repayment

Auto Loans come with minimal processing fees and documentation requirements, making the entire loan application process easier.

How to compare Auto Loans?


Auto Loans can be compared based on Annual Percentage Rate (APR), loan term, and fees involved.

  • APR represents the percentage of the principal amount you pay each year as interest. It determines the total cost of the loan.
  • The loan term refers to the duration of repayment of the loan. Typically, long-term loans result in a higher APR, and short-term loans lead to a lower APR.
  • Additionally, processing fees, such as origination and documentation fees, are also included in the loan repayment. The origination fee is the amount you pay to secure your loan with a lender, while the documentation fee represents the lender’s charges for securing your loan.

What credit score is used for Auto Loans?


Lenders generally evaluate a credit score to check eligibility for an Auto Loan. This score specifically tells you about the repayment of your past loans. It is recommended to have a credit score of 750 or higher to be eligible for a favourable Auto Loan interest rate.

Also Read: How to avail 24x7 Top-Up Car Loan?

Wrapping up


Auto Loans are regular Car Loans that help you spread the cost of your car over more manageable EMIs. Understanding your Auto Loans' terms, interest rates, and repayment plans is crucial for making informed decisions based on your financial goals and objectives.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.